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When the Legislature reconvenes tomorrow, the question of what to do about the Michigan Public School Employee Retirement System – or MPSERS – may get a clear answer from the Senate. After failing to approve a House of Representatives reform plan on repeated occasions, or coalesce around their own change, the Senate appears ready to leave in place the hybrid defined benefit/defined contribution pension system, but make other changes to cut the plan’s $45 billion in unfunded liability.

In addition, the Senate will agree to a fiscal analysis of the costs of converting to only a defined-contribution plan, a change sought by several members of the Republican Senate majority. Though there is disagreement over the costs of such a conversion, the consensus in Lansing is that the sum will be considerable – thereby complicating efforts to change the pension plan to ease the financial burden on local school districts, while also closing the unfunded gap in the plan itself.

"It boils down to cash flow," said Sen. Roger Kahn, R-Saginaw Township and a member of the GOP work group that has been drafting the legislation. "You can want to change the system from defined benefit to defined contribution; you can want to put some additional dollars toward pre-funding retiree health care; but you have to do that in the context of what are the available dollars."

Kahn and others quoted a House Fiscal Agency analysis that put the increased normal costs of a defined-contribution-only plan for new hires at $8.2 billion through 2041. In addition, a conversion to "DC" would require an additional $1.8 billion in investments over the next eight years to comply with Governmental Accounting Standards Board rules. When pension plans are in transition, they typically must carry high upfront costs to cover benefits in the old system, which current employees are no longer paying into.

Those costs are too high to rush a transition, Kahn said. So the Legislature will appoint an independent team to definitely analyze the situation again, and hope to have an answer by later in the fall. In the meantime, the MPSERS contribution rate borne by school districts will be capped at 24.46 percent of payroll. If no bill was passed, the districts would be paying 27.37 percent. The savings will total about $250 million statewide.

"Obviously, school districts need to know what they’ll be facing," said Brad Biladeau, director of governmental relations for the Michigan Association of School Administrators. "Changes in the rate could mean as much as $150 per pupil for our public schools. That’s a significant amount. Our position is to push for reform efforts that put dollars in the classroom."

School labor groups call the House plan, and the hybrid system, the lesser of two evils. Todd Tennis, spokesperson for the Coalition for Secure Retirement, said the reforms still push too much of the burden onto retirees and employees; retirees will pay more for their health-care premiums, and current employees will have to contribute more.

But, Tennis said, the two plans are "a question of drinking motor oil or arsenic. Both make you sick, but one will kill you."

Advocates for a defined contribution-only system aren’t giving up.

"It seemed for a while there was a DC vs. no-DC argument," said Deb Drake, chief of staff for Sen. Mark Jansen, R-Gaines Township, who strongly favors a full conversion. "Several conversations later, we all agree DC is the goal, but how to get there is the argument."

The team charged to study transition costs will be appointed by leaders of the House and Senate, as well as the Governor’s Office. Kahn said he wanted to be satisfied they would work independently.

"One side doesn’t want to see the Mackinac Center or the (Laura and John) Arnold Foundation involved," he said. "The other doesn’t want to see a study from the (Michigan) Office of Retirement Services. It’s important that it be independent. If it’s unbiased, the numbers will be believable. If it’s gamed, all bets are off."

Staff Writer Nancy Nall Derringer has been a writer, editor and teacher in Metro Detroit for seven years, and was a co-founder and editor of GrossePointeToday.com, an early experiment in hyperlocal journalism. Before that, she worked for 20 years in Fort Wayne, Indiana, where she won numerous state and national awards for her work as a columnist for The News-Sentinel.

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Comments

I published a summary of the pension dangers two years ago in for the Center for Michigan (http://thecenterformichigan.net/a-bill-coming-due-for-the-michigan-public/).
The magnitute of the problem is much bigger than publicized for the same reasons I spelled out in my article. The system is a train wreck that will continue to bleed K-12 operating budgets. Protect the pension benefit (prefund with a bond - paid by a consistent and predictable stream of funds from the K-12 budget) and cut off the health care benefit for everyone under 40 or 45. This is the only possible way to stabilze the pension for anyone still in the system. Anything else is just an act of desperation and denial.

Ms. Derringer is not being accurate when she says, " When pension plans are in transition, they typically must carry high upfront costs to cover benefits in the old system, which current employees are no longer paying into." Current employees remain in the old system. It is just new employees who would be placed in the new system. And it is not true that the "transition costs" are necessarily high. Utah made the change a couple of years ago and they are amortizing their unfunded liability over a number of years.
And it is very nice that the school districts will save money due to pension contributions being capped, but won't that worsen the unfunded liability?